Pay-Downs, Not Charge-Offs, Drive Lower Credit Card Balances

Consumers pay down $72 billion in credit card debt.

July 29, 2011

Consumers made $72 billion more in credit card payments than they did in credit card purchases between the first quarters of 2009 and 2010, according to an analysis of 1.65 million credit card accounts by TransUnion.

This is in stark contrast to the belief that charge-offs were the primary driver of lower credit card balances since the start of the recession, says Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit. “Our analysis shows that consumers have made a concerted effort to pay down their credit cards during these uncertain economic times.”

Five years prior to the TransUnion analysis, consumers had made an estimated $2.1 billion more in purchases than payments—a nearly $75 billion turnaround in consumer payment dynamics from 2004 to 2009.

“This reversal is even more profound when you consider that alternative forms of revolving credit, e.g. home equity lines of credit, were far more accessible in 2004 than in 2009,” Becker adds. “So while charge-offs have played a major role in lower credit card debt levels, [they weren’t] the only factor. Consumers were also paying down their debt across the risk spectrum.”

On a per-borrower basis between Q1 2009 and Q1 2010, average credit card debt in the U.S. declined more than $600 from $5,776 to $5,165. As of the first quarter of 2011, average credit card debt per borrower stood at $4,679, representing a 10-year low.

Most consumers either current on their payments or less than 60 days delinquent had declining balances, across the credit risk spectrum. The analysis viewed anonymous credit files using the TransUnion Account Management 3.0 scoring model (150-900 scale).

It revealed the percent of consumers with decreasing balances by credit score range:

801-850: 58.30%

701-750: 58.97%

601-650: 54.98%

501-550: 53.44%

“The drivers of deleveraging on an incident basis are different at various points along that credit risk spectrum,” Becker says. “Charge-off is a more predominant driver of deleveraging among subprime consumers. Among prime consumers, pay-down is the major factor. Although it sounds simple, this is critical insight for lenders: it allows them to better understand the preferences of various subsegments of consumers and respond appropriately to each.”

Consumers increasingly prefer debit over credit. Debit card use now exceeds all other forms of noncash payments, according to the Federal Reserve.

And according to an IBOPE Zogby International survey commissioned by TransUnion in early June, roughly 55% of consumers chose debit over credit more than half the time when making daily purchases.

In fact, 47% of respondents said they did so more than three out of four times. Another 8% of respondents said they chose debit cards over credit cards 51% to 75% of the time.

“All things being equal, we believe consumers, especially younger adults, will continue to have an increasing preference to use their debit cards over credit cards," says Steve Chaouki, group vice president in TransUnion's financial services business unit.

“However, the credit/debit card landscape is still in transition,” he continues. “Regulatory and legislative proposals either currently under discussion or recently enacted will impact the industry significantly and could alter this payment preference trend. Thus, consumer credit use and behavior should be closely monitored in the coming years.”